Extractive States: the Case of the Italian Unification.∗
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Extractive States: The Case of the Italian Unification.∗ Guilherme de Oliveira and Carmine Guerriero Columbia Law School and University of Bologna March 31, 2017 Abstract Despite the huge evidence on the adverse impact of extractive policies, we still lack a framework that identifies their determinants. Here, we lay out a two-region, two-social class model for thinking about this issue, and we exploit its implications to identify the causes of the opening of the present-day divide between North and South of Italy. Differently from the extant literature, we document that it arose because of the region- specific policies selected between 1861 and 1911 by the elite of the Kingdom of Sardinia, which annexed the rest of Italy in 1861. While indeed pre-unitary land property tax revenues and railway diffusion were shaped by each region's farming productivity but not by its political relevance for the Piedmontese elite, the opposite was true for the post-unitary ones. Moreover, post-unitary tax distortions and the severity of the re- maining extractive policies|captured by the region's taxation capacity and political relevance|determined the North-South gaps in culture, literacy, and development but not that in the manufacturing industry value added. Consequently, extraction neither eased the formation of an unitary market nor favored industrialization. Our results remain robust to considering fixed region and time effects and the structural conditions differentiating the two blocks in 1861, i.e., pre-unitary inclusiveness of political insti- tutions, land ownership fragmentation, and inputs. Crucially, our framework clarifies the incentives of dominating groups in other unions, e.g., post-Civil War USA and EU. Keywords: Extractive States; Political Union; Culture; State Capacity. JEL classification: H20; H70; N4; Z10. ∗We are indebted to Brian A'Hearn, Toke Aidt, Marco Casari, Decio Coviello, Giuseppe Dari-Mattiacci, Andy Hanssen, Eliana La Ferrara, Raffaella Paduano, Enrico Perotti, Torsten Persson, Laura Rondi, Avra- ham Tabbach, Guido Tabellini, Davide Ticchi, Paola Valbonesi, and seminar participants at Bologna, IMT, Maastricht University, UvA, and at the 2014 Winter Meeting of the Econometric Society for the insightful comments, to Carlo Ciccarelli, Mark Dincecco, Giovanni Federico, Stefano Fenoltea, Luigi Guiso, Giovanni Iuzzolino, Paolo Malanima, Luca Pennacchio, Guido Pescosolido, Paolo Pinotti, Giovanni Vecchi, and An- drea Vindigni for the data provided, and to the staffs of the Biblioteca Nazionale Centrale and the Biblioteca SVIMEZ, both in Roma, for the guidance. Guilherme de Oliveira wishes to thank the \Funda¸c~aopara a Ci^enciae Tecnologia" for support through the Grant SFRH/BD/76122/2011, whereas Carmine Guerriero wishes to thank EIEF for hosting him while the first version of this paper was written. Corresponding author: Carmine Guerriero. Address: Strada Maggiore 45, 40125 Bologna, Italy. E-mail: [email protected] \The vast majority of the population [:::] feels entirely cut off from our institutions. People see them- selves subjected to the State and forced to serve it with their blood and their money, but they do not feel that they are [an] organic part of it." (Sydney Sonnino, Speech to the Chamber of Deputies, 30 March 1881). 1 Introduction Despite the huge evidence documenting that extractive institutions and policies can limit the access to rents discouraging in turn innovation (North et al., 2009) and can undermine both property rights protection and contract enforcement (Acemoglu and Robinson, 2012), we still lack a framework that identifies their determinants. Here, we lay out a two-region, two-social class model for thinking about this issue, and we exploit its implications to propose a novel account of the present-day economic divide between North and South of Italy.1 A well-known literature has traced back this gap to the diverse political trajectories followed by the two clusters during the Middle Ages (Putnam et al., 1993). In particular, the experience of more inclusive political institutions|i.e., the communes|would have helped Northern Italy develop a stronger culture of cooperation easing economic interactions (Guiso et al., 2016; Tabellini, 2010). Recent contributions however have raised several doubts on this slant. First, Boranbay and Guerriero (2016) show for Europe that instead the main driver of present-day culture has been the medieval need of sharing climate-driven consumption risk and that, up to the 17th century, the two clusters displayed similar cultural endowments. Second, a growing body of research reveals that the two groups were similarly underdeveloped in 1861 (Federico, 2007; Ciccarelli and Fenoaltea, 2013). Inspired by this evidence, we document that the opening of the present-day divide is the result of the region-specific policies selected between 1861 and 1911 by the elite of the Kingdom of Sardinia, which annexed the rest of Italy in 1861. They penalized more the regions farther away from the fiercer enemy of the House of Savoy and so less politically relevant for the Piedmontese elite. In the model, we consider two regions, which are first independent and then unified by a completely unforeseen shock similar to the one that originated the unitary state. The Northern region represents the Kingdom of Sardinia, whereas the Southern one stands for 1To elaborate, in 2008 Southern Italy displayed a nine percent lower share of respondents to the European Value Study reporting \tolerance and respect for other people" as important qualities children should be encouraged to learn and a 40 percent lower income per capita than Northern Italy (Iuzzolino et al., 2011). 2 any of the other states annexed by the Kingdom of Italy in 1861. Each region is inhabited by a mass zero elite and a mass one citizenry, who consumes the untaxed supply of a private good and a region-specific public good whose production is financed through the tax revenues not appropriated by the elite. The private good technology is multiplicative in the region-specific productivity and the citizenry's investment in an input that can be seen as either a culture of cooperation or human capital. The first interpretation links directly our setup to the extant literature on the medieval determinants of the present-day divide. Under autarky, each elite selects her region's tax rate by maximizing the sum of the citizenry's welfare and the rents net of linear tax-collection costs. Thus, equilibrium tax revenues fall with the marginal tax- collection costs and, because these are sizable, with the taxable value and thus the regional productivity. Under political union instead, both region-specific tax rates are selected by the Northern elite, who is less concerned with the Southern citizenry's welfare and appropriates from the South relatively more than the Southern elite can under autarky. In particular, the extractive power of the Northern elite is sufficiently strong to make taxation of the South profitable at the margin. These assumptions are consistent with the fact that the unitary state exercised a tight control on the annexed regions and was dominated by the elite of the Kingdom of Sardinia, who was chiefly interested in the Northern export-oriented farming and industry. The mix between stronger extractive capacity and her limited concerns with the South leads the Northern elite to raise from this region tax revenues rising with the South's productivity and falling with both the marginal tax-collection costs and the South's political relevance, i.e., the weight the Northern elite attaches to the Southern citizenry's welfare. In addition, extraction from the South is larger than under autarky, provided that the South's technology is not too backward, and pushes the Southern citizenry to prefer private to public good production. Hence, the Southern citizenry's investment and welfare rise with the factors limiting taxation, like the marginal tax-collection costs and the political relevance, and unification damages the South when it is not sufficiently salient for the North. To test these predictions, we analyze the thirteen present-day Italian regions annexed by the Kingdom of Italy between 1861 and 1911 but not part of the Kingdom of Sardinia. Being the Italian economy mainly agrarian over our 1801-1911 sample, we proxy the extent of extraction first and foremost with the land property taxation. Given the available in- 3 formation however, we do not study land property tax rates but the relative revenues per capita. Land property tax rates have been region-specific over the whole sample and, absent developed financial markets, dramatically shaped the landowners' capacity to invest in new farming technologies and the industry. Turning to the regional productivity, we rely upon the geographic drivers of the profitability of the main export-oriented farming sectors, i.e., arboriculture and sericulture. Next, we use as inverse metrics of the marginal tax-collection costs a measure of state capacity, i.e., the share of previous decade in which the state to which the region belonged partook in external wars. Finally, we propose as an inverse proxy for political relevance the distance between each region's main city and the capital of the fiercer enemy of the House of Savoy. Being our model applicable to any extent of extraction, these two proxies also capture the impact on the South of the other distortionary policies selected by the post-unitary government and illustrated in our historical analysis. Consistent with our model, while the pre-unitary revenues from land property taxes in 1861 lire per capita were shaped by each region's farming productivity but not by its political relevance for the Piedmontese elite, the opposite was true for the post-unitary ones. More- over, post-unitary tax distortions|proxied with the difference between the observed revenues and the counterfactual ones forecasted through pre-unitary estimates|and the severity of the remaining extractive policies|captured by the region's taxation capacity and political relevance|determined the North-South gaps in culture, literacy, and development.